Bettina Bien Greaves introduces this unpublished manuscript by Ludwig von Mises, in which our author parses the differences between free and unfree systems.
Interventionism: An Economic Analysis
By Ludwig von Mises. Foreword by Bettina Bien Greaves. Foundation for Economic Education, 1997. Unpublished, Originally Written 1940.
Interventionism: An Economic Analysis
Note: Footnotes have been omitted from this version. For the original text, please visit the Foundation for Economic Education here.
Ludwig von Mises lived a long life—from 1881 to 1973. He was born within the borders of the huge European empire of Austria‐Hungary and was for many years the leading spokesman of what became known as the Austrian School of Economics. This theoretical school differs from other schools of economics because it does not deal with aggregates, large numbers, or historical data. It uses a micro rather than a macro approach to economics. It traces all economic phenomena back to the actions of individuals—to their subjective values and to the value each market participant places on the marginal utility of a particular good or service. The Austrians view the world economy as a giant auction in which everyone is always bidding for the various goods and services he or she wants by offering something he or she has. By starting from the viewpoint of the individual actor and by reasoning logically step by step, Mises and his fellow Austrian economists were able to explain the development of prices, wages, money, production, trade, and so on.
Mises was prolific. He wrote many books and articles. He traveled and lectured widely throughout Europe and gained an international reputation as a strong advocate of capitalism and an ardent critic of interventionism. However, Mises’s teachings were drowned out for many years by the overwhelming popularity of John Maynard Keynes, Keynes’s macroeconomic doctrines, and his proposals for government intervention and politically expedient spending programs.
Mises left Vienna for Switzerland before the Germans, under Hitler, occupied Austria. He taught in Geneva at the Institute for International Studies until 1940, when he migrated to the United States. His reputation had been well‐established in Europe. But when he arrived in this country at age 59, he was a stranger in a strange land, obliged to start almost all over again. He soon obtained an appointment at the National Bureau of Economic Research, which gave him the opportunity to write the manuscript for this book.
Anyone who is familiar with Mises’s other writings will not find anything particularly surprising in this book. Mises frequently criticized the various aspects of government intervention and he often described how government intervention interferes with the attempts of individuals to accomplish their various goals. However, in none of his other writings does he explain government intervention and its consequences more clearly and simply than he does here.
Mises wrote Interventionism: An Economic Analysis in his native German tongue. After it had been translated by Drs. Thomas McManus and Heinrich Bund, he considered it “ready for publication.” However, apparently nothing was done about the manuscript and it disappeared from view. When this project came to nought, Mises, of necessity, turned his efforts toward other writing and lecturing. In 1944, his Bureaucracy and Omnipotent Government were published. In 1945, he received an appointment as Visiting Professor at New York University Graduate School of Business Administration and began teaching again. Then in 1946, he joined the staff of the Foundation for Economic Education as a part‐time adviser. Many other books followed, including especially his magnum opus, Human Action, in 1949.
This book, Interventionism, was written in 1940, before the United States was officially involved in World War II. Here Mises offers a rare insight into the war economies of Hitler’s Germany and Mussolini’s Italy. He also criticizes the pre‐World War II Allied governments for having favored socialism and interventionism over capitalist methods of production. As a matter of fact, he blames the Allies’ lack of military preparedness on their having fallen prey to anti‐capitalist propaganda and for having spent more effort trying to prevent war profiteering than on creating an economic climate conducive to the production of armaments. “When the capitalist nations in time of war give up the industrial superiority which their economic system provides them, their power to resist and their chances to win are considerably reduced.… The defeat of France and the destruction of English cities was the first price paid for the interventionist suppression of war profits.” (pp. 73, 75)
Throughout his career, Mises pointed out that individuals face risk and uncertainty in their struggle to survive. They encounter many obstacles—both natural and man‐made. Natural catastrophes such as earthquakes, floods, tornadoes, hurricanes, landslides, avalanches, and fires may disrupt their plans. Man‐made catastrophes such as wars, theft, fraud, and government interventions may also disrupt their plans. With respect to the obstacles nature places in their paths, men have no alternative but to cope as best they can. With respect to man‐made obstacles, however, the situation is different; men are not completely helpless; they have the capability of avoiding and/or removing them.
In explaining how the market functions, Mises criticized man‐made government interventions—controls, regulations, restrictions, special privileges, and subsidies for some at the expense of others. He always pointed out, as he does in this book, that although enacted with the best of intentions, such government interventions lead to conditions that even their advocates consider worse than those they were trying to alleviate. However, he also explained that such obstacles, being man‐made, were avoidable and removable—once people came to realize that government should not interfere with peaceful interpersonal relationships.
Mises also pointed out that government’s role should be limited. Government should protect equally the lives and property of all persons under its jurisdiction. It should adjudicate disputes among individuals so as to assure, insofar as possible, equal justice to all. Otherwise, it should leave people free to work out their own destinies. We are fortunate indeed that this manuscript, which explains in such clear terms these basic principles, has resurfaced from among the papers left at Mises’s death and is now being made available.
—Bettina Bien Greaves
It is the purpose of this essay to analyze the problems of government interference in business from the economic standpoint. The political and social consequences of the policy of interventionism can only be understood and judged on the basis of an understanding of its economic implications and effects.
Ever since the European governments in the last decades of the nineteenth century embarked on this policy which today frequently is called “progressive” but which actually represents a return to the mercantilist policy of the seventeenth and early eighteenth centuries, economists have persistently pointed out the inconsistency and futility of these measures and have predicted their political and social consequences. Governments, political parties, and public opinion have just as persistently ignored their warnings. They ridiculed the alleged doctrinarism of “orthodox” economics and boasted of their “victories” over economic theory. But these were Pyrrhic victories.
The inevitable sequence of events which followed upon the application of interventionist measures fully proved the correctness of the economists’ predictions. The predicted political effects, social unrest, dictatorship, and war, also did not fail to appear.
This essay is not intended to discuss specifically the American New Deal. It deals with interventionism in general, and its conclusions are valid for all instances of interventionism irrespective of the country concerned. There was a considerable amount of interventionism in America long before 1933. The New Deal is merely the present‐day, specifically American brand of a policy which began everywhere—including America—several decades ago. To the economist there is nothing new in the New Deal. It differs from the policy of Kaiser Wilhelm II and from the policy of the Weimar Republic only to the extent necessitated by the particular conditions of present‐day America. And it places the American people today in the same dilemma in which the German people found themselves ten years ago.
This essay is economic in character and, therefore, is not concerned with the legal and constitutional aspects of the problem. Laws and constitutions as such are of secondary importance only. They are to serve the people, not to rule the people. They are to be formulated and interpreted in such a way as to make possible an economic development beneficial to the welfare of all groups of the nation. If they fail to reach this aim, the laws and their interpretation ought to be changed.
There is certainly no lack of literature on this subject; almost every day new contributions appear. But almost all of these studies are concerned exclusively with particular groups of measures and their short‐run effects. This method of analysis is woefully inadequate. It merely shows the immediate consequences of individual interventions without considering their indirect and long‐run effects. It takes into account only the alleged benefits and disregards the costs and detriments.
In this way, of course, a comprehensive appraisal of the social and economic consequences of interventionism can never be reached. That certain individuals or small groups of individuals may sometimes be temporarily privileged or benefited by certain interventionist measures cannot be denied. The question is, however, what further effects are caused, particularly if the attempt is made to accord in the same way privileges to large sections of the population or even to the whole nation. It is therefore essential to study the totality of interventionist policy, not only its short‐run but also its long‐run effects.
It would be a thorough misinterpretation of my statements to consider them as a criticism of the statesmen and politicians in power. My criticism is not aimed at men, but at a doctrine. No matter what the constitution of the country, governments always have to pursue that policy which is deemed right and beneficial by popular opinion. Were they to attempt to stand up against the prevailing doctrines they would very soon lose their positions to men willing to conform to the demands of the man in the street. Dictators too can only seize and maintain power if they are backed by the approval of the masses. The totalitarianism of our times is the product of the wide acceptance of totalitarian ideology; it can only be overcome by a different philosophy.
If we are to understand economic problems, we have to keep ourselves free of all prejudices and preconceived opinions. If we are convinced beforehand that the measures which are being recommended to benefit certain groups or classes, for instance laborers or farmers, actually do benefit and do not injure those groups, and if we are determined not to abandon our prejudices, we shall never learn anything. It is the very task of economic analysis to ascertain whether the policies recommended by the various parties and pressure groups actually lead to the results which their advocates desire.
The problem is not whether the capitalist system (i.e., the market economy) is good or bad. The real question is whether it would be in the interest of the masses of the people to replace the market economy by another system. When someone points out some unfavorable conditions which the market economy has not been able to eliminate he has by no means proved the practicability and desirability of either interventionism or socialism.
This certainly is still the least objectionable argumentation. As a rule, capitalism is blamed for the undesired effects of a policy directed at its elimination. The man who sips his morning coffee does not say, “Capitalism has brought this beverage to my breakfast table.” But when he reads in the papers that the government of Brazil has ordered part of the coffee crop destroyed, he does not say “That is government for you”; he exclaims, “That is capitalism for you.”
An analysis of the problems with which this book is concerned must be conducted strictly according to the rules of logic and has to avoid everything that might disturb the objective judgment by appeal to the emotions. Consequently I have refrained from making this essay more entertaining by including amusing anecdotes about the ridiculously paradoxical measures of contemporary economic policy. I feel certain that this will be appreciated by the serious reader.
Some people may object that it is insufficient to discuss these problems from an economic standpoint only. They include, it is said, more than merely economic aspects, namely politics, philosophy of life, and moral values. I definitely disagree. All political arguments of our time center around capitalism, socialism, and interventionism. Certainly there are many more things in life. But our contemporaries—not just the economists—have placed the question of economic organization in the center of their political thinking. All political parties confine themselves to economic aspects; they recommend their programs with the assertion that their execution will make their supporters richer. All pressure groups fight for economic betterment; all parties are today economic parties. Hitler and Mussolini proclaim: “We ‘have‐nots’ are out to get a share of the wealth of the plutocrats.” Ownership is the battlecry of the day. We may well approve or disapprove of this fact, but we cannot deny its existence.
Therefore it is not arrogance or narrowmindedness that leads the economist to discuss these things from the standpoint of economics. No one, who is not able to form an independent opinion about the admittedly difficult and highly technical problem of calculation in the socialist economy, should take sides in the question of socialism versus capitalism. No one should speak about interventionism who has not examined the economic consequences of interventionism. An end should be put to the common practice of discussing these problems from the standpoint of the prevailing errors, fallacies, and prejudices. It might be more entertaining to avoid the real issues and merely to use popular catchwords and emotional slogans. But politics is a serious matter. Those who do not want to think its problems through to the end should keep away from it.
The moment has come in which our contemporaries have thoroughly to reconsider their political ideas. Every thinking person has frankly to admit that the two doctrines which for the past twenty years have exclusively dominated the political scene have obviously failed. Both anti‐fascism and anti‐communism have utterly lost their meaning since Hitler and Stalin have ceased to conceal their alliance from the world.
I hope to render with this book a service to those who seek a clarification of their ideas and a better understanding of the problems of the world today.
I do not want to close this preface without expressing my sincere gratitude to my two colleagues Drs. Heinrich Bund and Thomas McManus who have aided in the preparation of the manuscript and in its translation.
—Ludwig von Mises
1. The Problem
We call capitalism or market economy that form of social cooperation which is based on private ownership of the means of production.
Socialism, communism, or planned economy, on the other hand, is the form of social cooperation which is based on public ownership of the means of production. The terms state capitalism and authoritarian economy have essentially the same meaning.
It is frequently asserted that a third form of social cooperation is feasible as a permanent form of economic organization, namely a system of private ownership of the means of production in which the government intervenes, by orders and prohibitions, in the exercise of ownership. This third system is called interventionism. All governments which do not openly profess socialism tend to be interventionist nowadays, and all political parties recommend at least some degree of interventionism. It is claimed that this system of interventionism is as far from socialism as it is from capitalism, that as a third solution to the social problem it stands midway between the two systems, and that while retaining the advantages of both it avoids the disadvantages inherent in both.
In this study the question will be analyzed whether we are justified in considering interventionism as a possible and viable system of social cooperation. We shall attempt to answer the question whether interventionism is able to accomplish what its advocates expect, and whether, perhaps, it does not produce consequences diametrically opposed to those sought by its application.
Such an analysis has more than merely academic value. With the exception of the two socialist countries of Soviet Russia and Nazi Germany, interventionism is today throughout the world the prevailing economic system. Therefore, an understanding of interventionism and its inevitable consequences is an essential prerequisite for a comprehension of present‐day economic problems.
We intend in this analysis to refrain from value judgments. Consequently we do not ask whether interventionism is good or bad, moral or immoral, to be commended or condemned. We merely ask from the standpoint of those who want to put it into operation whether it serves or frustrates their intentions. In other words, does its application attain the ends sought?
In order to answer these questions we have first to clarify the meaning of the terms of capitalism, socialism, government, and intervention.
2. Capitalism or Market Economy
In the capitalistic economy the means of production are owned by individuals or associations of individuals, such as corporations. The owners use the means of production directly to produce, or they lend them, for a compensation, to others who want to use them in production. The individuals or associations of individuals who produce with their own or with borrowed money are called entrepreneurs.
Superficially, it seems that the entrepreneurs decide what should be produced, and how it should be produced. However, as they do not produce for their own needs but for those of all members of the community, they have to sell the products on the market to consumers, that is, those individuals who want to use and consume them. Only that entrepreneur is successful and realizes a profit who knows how to produce in the best and cheapest way, that is with a minimum expenditure of material and labor, the articles most urgently wanted by the consumers. Therefore, in actuality the consumers, not the entrepreneurs, determine the direction and scope of production. In the market economy the consumers are sovereign. They are the masters, and the entrepreneurs have to strive, in their own interest, to serve the wishes of the consumers to the best of their ability.
The market economy has been called a democracy of consumers, because it brings about a daily recurring ballot of consumer preferences. The casting of votes at an election and the spending of dollars in the market are both methods of expressing public opinion. The consumers decide, by buying or by refraining from buying, the success or failure of the entrepreneurs. They make poor entrepreneurs rich and rich entrepreneurs poor. They take away the means of production from those entrepreneurs who do not know how to use them best in the service of the consumers and transfer them to those who know how to make better use of them. It is true that only the entrepreneurs producing consumers’ goods have direct contact with the consumers; only they are immediately dependent on the consumers; only they receive directly the consumers’ orders. But they transmit those orders and their dependence to the entrepreneurs who bring producers’ goods to the market. The producers of consumers’ goods have to purchase where they can, at lowest cost, the producers’ goods which are required for the ultimate satisfaction of the wants of the consumers. Should they fail to use the cheapest supplies, should they fail to make the most efficient use of the producers’ goods in production, they would be unable to satisfy the wants of the consumers at lowest prices; more efficient entrepreneurs who know better how to buy and how to produce would crowd them out of the market. The consumer as buyer may follow his own liking and his own fancy. The entrepreneur must do the buying for his enterprise as the most efficient satisfaction of the wants of the consumers’ dictates. Deviations from this line prescribed by the consumers affect the entrepreneur’s returns, thus causing losses and endangering his position as entrepreneur.
Such is the oft‐decried harshness of the entrepreneur who figures everything in dollars and cents. He is forced to take this attitude by order of the consumers, who are unwilling to reimburse the entrepreneurs for unnecessary expenditures. What in everyday language is called economy is simply law prescribed by the consumers for the actions of the entrepreneurs and their helpers. The consumers, by their behavior in the market, are the ones who indirectly determine prices and wages and, thus, the distribution of wealth among the members of society. Their choices in the market determine who shall be entrepreneur and owner of the means of production. By every dollar spent, the consumers influence the direction, size, and kind of production and marketing.
The entrepreneurs do not form a closed class or order. Any individual may become an entrepreneur if he has the ability to foresee the future development of the market better than his fellow‐citizens, if he can inspire the confidence of capitalists, and if his attempts to act on his own risk and responsibility prove successful. One becomes an entrepreneur, literally, by pushing forward and exposing oneself to the impartial test to which the market puts everyone who wants to become or remain an entrepreneur. Everyone has the privilege of choosing whether he wants to submit himself to this rigorous examination or not. He doesn’t have to wait to be asked to do so—he must step forward on his own initiative, and he has to worry where and how he can secure the means for his entrepreneurial activity.
For decades it was repeatedly asserted that the rise of poor people into entrepreneurial positions was no longer possible in the stage of “late capitalism.” The proof for this assertion was never given. Since this thesis was first voiced, the composition of the entrepreneurial class has basically changed; a considerable part of the former entrepreneurs and their heirs have disappeared, and the most outstanding entrepreneurs of today are again what we usually call self‐made men. This constant recomposition of the entrepreneurial elite is as old as the capitalist economy itself and forms an integral part of it.
What is true of the entrepreneurs holds true for the capitalists as well. Only the capitalist who knows how to use his capital properly (from the consumer’s point of view), that is, to invest it so that the means of production will be employed most efficiently in the service of consumers, is able to keep and augment his property. If he does not want to suffer losses the capitalist has to place his means at the disposal of successful enterprises. In the market economy the capitalist, just like the entrepreneurs and the workers, serves the consumers. It seems superfluous to point out specifically in this connection that the consumers are not merely consumers but that the totality of the consumers is identical with the totality of the workers, entrepreneurs, and capitalists.
In a world of unchanging economic conditions the exact amounts which the entrepreneurs would expend for the means of production as wages, interest, and rent, would later be received by them in the prices of their products. Production costs would thus equal the prices of the products and the entrepreneurs would neither make profits nor suffer losses. But the world of reality is constantly changing, and therefore all industrial activity is essentially uncertain and speculative in character. Goods are produced to meet a future demand, about which we have little positive knowledge in the present. It is from this uncertainty that profits and losses arise; the profits and losses of the entrepreneurs depend upon how successfully they can forecast the state of future demand. Only that entrepreneur realizes a profit who anticipates the future wants of the consumers better than his competitors.
It is irrelevant to the entrepreneur, as the servant of the consumers, whether the wishes and wants of the consumers are wise or unwise, moral or immoral. He produces what the consumers want. In this sense he is amoral. He manufactures whiskey and guns just as he produces food and clothing. It is not his task to teach reason to the sovereign consumers. Should one entrepreneur, for ethical reasons of his own, refuse to manufacture whiskey, other entrepreneurs would do so as long as whiskey is wanted and bought. It is not because we have distilleries that people drink whiskey; it is because people like to drink whiskey that we have distilleries. One may deplore this. But it is not up to the entrepreneurs to improve mankind morally. And they are not to be blamed if those whose duty this is have failed to do so.
Thus the market in the capitalist economy is the process regulating production and consumption. It is the nerve‐center of the capitalist system. Through it the orders of the consumers are transmitted to the producers, and the smooth functioning of the economic system is secured thereby. The market prices establish themselves at the level which equates demand and supply. When, other things being equal, more goods are brought to the market, prices fall; when, other things being equal, demand increases, prices rise.
One thing more must be noted. If within a society based on private ownership of the means of production some of these means are publicly owned and operated, this still does not make for a mixed system which would combine socialism and private property. As long as only certain individual enterprises are publicly owned, the remaining being privately owned, the characteristics of the market economy which determine economic activity remain essentially unimpaired. The publicly owned enterprises, too, as buyers of raw materials, semi‐finished goods, and labor, and as sellers of goods and services, must fit into the mechanism of the market economy; they are subject to the same laws of the market. In order to maintain their position they, too, have to strive after profits or at least to avoid losses. When it is attempted to mitigate or eliminate this dependence by covering the losses of such enterprises by subsidies out of public funds, the only accomplishment is a shifting of this dependence somewhere else. This is because the means for the subsidies have to be raised somewhere. They may be raised by collecting taxes; the burden of such taxes has its effects on the market, not on the government collecting the tax; it is the market and not the revenue department which decides upon whom the tax falls and how it affects production and consumption. In these facts the domination of the market and the inescapable force of its laws is evidenced.
3. The Socialist Economy
In the socialist order all means of production are owned by the nation. The government decides what should be produced and how it should be produced, and allots each individual a share of the consumers’ goods for his consumption.
This system might be realized according to two different patterns.
The one pattern—we may call it the Marxian or Russian pattern—is purely bureaucratic. All economic enterprises are departments of the government just as are the administrations of the army and the navy or the postal system. Every single plant, shop, or farm, stands in the same relation to the superior central organization as does a post office to the postal system. The whole nation forms one single labor army with compulsory service; the commander of this army is the chief of state.
The second pattern—we may call it the German system—differs from the first one in that it, seemingly and nominally, maintains private ownership of the means of production, entrepreneurship, and market exchange. Entrepreneurs do the buying and selling, pay the workers, contract debts, and pay interest and amortization. But they are entrepreneurs in name only. The government tells these seeming entrepreneurs what and how to produce, at what prices, and from whom to buy, at what prices, and to whom to sell. The government decrees to whom and under what terms the capitalists should entrust their funds and where and at what wages laborers should work. Market exchange is but a sham. As all prices, wages, and interest rates are being fixed by the authority, they are prices, wages, and interest rates in appearance only; in reality they are merely determinations of quantity relations in authoritarian orders. The authority, not the consumers, directs production. This is socialism with the outward appearance of capitalism. The labels of the capitalistic market economy are retained, but they signify here something entirely different from what they mean in the true market economy.
We have to point out this possibility to prevent a confusion of socialism and interventionism. The system of a hampered market economy or interventionism differs from socialism by the very fact that it is still a market economy. The authority seeks to influence the market by the intervention of its coercive power, but it does not want to eliminate the market completely. It desires that production and consumption should develop along lines different from those prescribed by the unhindered market, and it wants to achieve this aim by injecting into the workings of the market, orders, commands, and prohibitions, for whose enforcement the power and constraint apparatus stand ready. But these are isolated interventions; they do not combine into a completely integrated system which regulates all prices, wages, and interest rates, and which thus places the direction of production and consumption in the hands of the authority.
It is not the task of this essay to raise the question whether a socialist economy is feasible. The subject matter of our analysis is interventionism, not socialism. Consequently, it is only incidentally that we point out that socialism is unworkable as a universal economic system, because a socialist society would not be able to make rational calculations in economic matters. The economic calculation which we use in the capitalistic economy is based on market prices, which are formed in the market for all goods and services, consequently for producers’ goods and for labor services as well. Only money prices make it possible to bring costs which originate through the expenditure of various goods and different qualities of labor to a common denominator so they may be compared with prices which were realized or which can be realized on the market. Thus it is possible to establish, in definite figures, the probable effect of a planned action and to know the actual effect of actions carried out in the past. In a socialist economy which does not have prices for producers’ goods—there being no market for the means of production because they are all owned by the state—the opportunity to make such calculations would not exist.
Let us assume, for instance, that the government of a socialist country would want to build a house. The house may be built of brick or wood, stone, concrete, or steel. Each of these ways offers, as seen from the point of view of the evaluating government, various advantages, requires different expenditures of labor and materials, and requires a different production period. On which method will the government decide? It cannot reduce the different expenditures of labor and materials of various kinds to a common denominator and, therefore, cannot compare them. It cannot make either the construction period or the use‐period play a calculable part in its considerations. Therefore it cannot compare expenditures and benefits, costs and returns. It does not know whether or not its decisions concerning its use of the factors of production are rational from the standpoint of its own valuation of consumers’ goods.
Around the middle of the past century, for example, the suggestion might have been presented to such a government to restrict sheep‐rearing considerably in Europe and to find a new location for it in Australia. Or the suggestion might have been made to replace horse power with steam power. What means did the government have at its disposal to ascertain whether these and other innovations were advantageous from an economic standpoint?
Yes, say the socialists, but capitalistic calculation is not infallible either; the capitalist too may err. Certainly, this has happened before and will happen again, because all economic activity looks toward the future, and the future is always unknown. All plans become futile when the expectations with regard to future developments are not fulfilled. But this objection is beside the point. Today, we calculate from the standpoint of our present knowledge and from the standpoint of our present expectations about the future. The problem does not lie in the fact that the government may err because it may misjudge the future, but rather in its inability to make calculations even from the standpoint of its present valuations and expectations. If, for instance, a government proceeds with the erection of tuberculosis hospitals it may discover later, when a simpler and more efficient means of combating the disease is found, that it invested capital and labor unwisely. But the crux of the problem is: How can the government know today how to build such hospitals in the most economical way?
Some railways would not have been built around 1900 if one could have foreseen, at that time, the development of motor traffic and aviation. But the entrepreneur who built railways then knew which among the construction alternatives he had to choose from the standpoint of his valuations and expectations at that time, and on the basis of market prices reflecting entrepreneurial evaluations of prospective demand. But this is exactly what the government of a socialist community will not know. It will be like the captain of a ship trying to sail the high seas without the resources of science or art of navigation.
We have presupposed that the government has decided to undertake a certain project. But even to arrive at this decision requires economic calculation. The decision in favor of building a power plant can only be made when it is established that this project would not divert means of production from more urgent uses. How shall this be ascertained without calculation?
4. The Capitalist State and the Socialist State
In a market economy the State concerns itself with the protection of the life, health, and private property of its citizens against force or fraud. The state insures the smooth working of the market economy by the weight of its coercive power. It refrains, however, from any interference with the freedom of action of the people engaged in production and distribution so long as such actions do not involve the use of force or fraud against the life, health, safety, or property of others. This very fact characterizes such a community as a market economy or a capitalist economy.
If liberals, i.e., classical liberals, oppose governmental interference in the economic sphere they do so because they feel certain that the market economy is the only efficient and workable system of social cooperation. They are convinced that no other system would be in a position to bring more welfare and happiness to the people. The English and French liberals and the fathers of the U.S. Constitution insisted upon the protection of private property, not to further the selfish interests of one class, but rather for the protection of the whole people and because they saw the welfare of the nation and of each individual most secure in the system of a market economy.
It is, therefore, naive to say that the true liberal advocates of private property are enemies of the state because they want to see the realm of governmental activity limited. They are not enemies of the state but opponents of both socialism and interventionism because they believe in the superior efficacy of the market economy. They want a strong and well‐administered state because they assign to it an important task: the protection of the system of a market economy.
Even more naive were the Prussian metaphysicians when they maintained that the program of the adherents of a market economy was negative. To these supporters of Prussian totalitarianism everything seemed negative that stood in the way of their desire to create more governmental jobs. The program of the advocates of a market economy is negative only in the sense in which every program is negative: It excludes all other programs. Because the true liberals are positively for private ownership of the means of production and for a market economy they are necessarily against socialism and interventionism.
Under socialism all economic matters are the responsibility of the state. The government gives orders in all lines of production just as in the army or in the navy. There is no sphere of private activity; everything is directed by the government. The individual is like the inmate of an orphanage or of a penitentiary. He has to do the work which he is ordered to do and he can consume only what has been allotted to him by the government. He can read only those books and papers printed by the government printing office and he can travel only if the government grants him the means for doing so. He has to assume the occupation which the government has chosen for him and he has to change his occupation and his domicile when the government commands. In this sense, we may say that the citizens of a socialist community are not free.
5. The Interventionist State
Under the system of a hampered market economy or interventionism both government and entrepreneurs are distinctly separate factors functioning in the economic sphere. The dualism of market and authority exists also in the system of a hampered market exchange. In contrast to the system of a pure market economy, however, the authority does not confine itself to the prevention of disturbances of market exchange. The government itself interferes by isolated interventions in the workings of the market; it orders and it forbids.
The intervention is an isolated order by the authority in command of the social power apparatus; it forces the entrepreneur and the owner of the means of production to use these means in a way different from what they would do under the pressure of the market. The order may be by command or interdiction. Command and interdiction need not ostensibly emanate from the government. It may happen that commands and interdictions emanate from a different source and that this other agency also supplies the power apparatus to enforce its orders. If the authority condones this procedure or even supports it, then the situation is the same as that created by direct governmental orders. If the government does not want to consent and opposes this action with its power apparatus, but without avail, this is evidence that another authority has succeeded in establishing itself and in contesting governmental supremacy.
Undoubtedly the government has the power to issue such commands and interdictions and also has the power to enforce them, through its police force. But the questions with which we are concerned in this essay are: Do these measures enable the government to achieve the aims it seeks? Do not these interventions perhaps produce results which, from the government’s point of view, appear even less desirable than the conditions in the free‐market economy which it seeks to change?
Consequently, we shall not concern ourselves with the question whether the government is in the hands of able or ineffectual, noble or ignoble men. Even the ablest and noblest man can achieve his aim only if he uses the proper means.
Nor do we have to deal with those interventions of the authority which are immediately aimed at consumption. The authority might, for instance, temporarily or permanently forbid the consumer to eat certain foods—let us say for health or religious reasons. The authority thus assumes the role of a guardian of the individual. It deems the individual incapable of looking out for his own best interests; he is to be protected by his paternal overseer from suffering harm.
The question whether the authority should pursue such a course or not is a political question, not an economic one. If one believes that the authority is God‐given and is called upon to play the part of Providence to the individual, or if one thinks that the authority has to represent the interests of society against the conflicting interests of the egoistic individuals, one will find this attitude justified. If the authority is wiser than its subjects with their limited intelligence, if it knows better what furthers the happiness of the individual than he himself pretends to know, or if the authority feels called upon to sacrifice the welfare of the individual to the well‐being of the whole, then it should not hesitate to set the aims for the actions of the individuals.
It would be an error, of course, to believe that the guardianship of the authority over the individual could remain confined to the domain of health, that the authority would conceivably be satisfied to forbid or to limit the use of dangerous poisons like opium, morphine, possibly also alcohol and nicotine, but that otherwise the freedom of the individual would remain untouched. Once the principle is acknowledged that the consumption choices of the individual are to be supervised and restricted by the authority, how far this control will expand depends only on the authority and the public opinion which motivates it. It then becomes logically impossible to oppose tendencies which want to subject all activity of the individual to the care of the state. Why only protect the body from the harm caused by poisons or drugs? Why not also protect our minds and souls from dangerous doctrines and opinions imperiling our eternal salvation? Depriving the individual of the freedom of the choice of consumption logically leads to the abolition of all freedom.
We may now turn to the economic side of the problem. When economics deals with the problems of interventionism it has only those measures in mind which primarily affect the means and not the aims of action. And it does not have any other standard by which to judge these measures than the one whether they are or are not able to achieve the aims which the authority seeks. The fact that the authority is in a position to restrict the choice of consumption for the individual and thus to alter the data of the market is beyond the scope of economic discussion.
For these reasons we do not concern ourselves with authoritarian measures immediately aimed at the direction of consumption which actually attain this aim without affecting other fields as well. We accept the action of the consumers in the market and do not take into consideration to what extent, if any, this action is influenced by the authority. We accept the valuations and the demands of the consumers as a fact, and we do not ask whether the consumers buy gas masks on their own initiative or because the government ordered them to do so, nor whether they buy less alcohol because they prefer other goods or because the government penalizes intoxication. Our task, however, is to analyze those interventions of the authority which are directed not at the consumers but at the owners of the means of production and at the entrepreneurs. And we do not ask whether these interventions are justified nor whether they conform to our wishes or to the wishes of the consumers. We merely inquire whether these measures can achieve the aims which the government wishes to attain.
6. The Plea for Moral Reform
Before we proceed, however, it appears advisable to give consideration to a doctrine which deserves some attention, if for no other reason than because it is backed by some of our most distinguished contemporaries.
We refer to the belief that it does not require the intervention of the government to bring the market economy to ways other than those it takes when it is able to develop unhampered. Christian social reformers and some representatives of an ethically motivated social reform think the religious and moral conscience ought to guide the “good” person in the economic realm as well. If all entrepreneurs would watch not only their profit and their selfish individual interests but would always think also of their religious and social obligations, the orders of the government would not be necessary to bring things into the proper channels. Not reform of the state would be required, but rather a moral purification of mankind, a return to God and to the moral law, an abandonment of the vices of selfishness and egoism. Then, it would not be difficult to bring private property of the means of production in accord with the social welfare. One would have freed the economy of the pernicious consequences of capitalism without having restricted, by governmental intervention, the freedom and initiative of the individual. One would have destroyed the Moloch Capitalism without having it replaced with the Moloch State.
We do not have to deal here with the value judgments underlying this doctrine. What these critics find objectionable in capitalism is irrelevant, and the errors and misunderstandings they expound need not concern us. We are only interested in their suggestion to build a social order on the dual foundation of private ownership of the means of production and of a moral law delimiting the exercise of this property right. This ideal social order supposedly is not socialism because under it the individuals, particularly the entrepreneurs, capitalists, and proprietors, are no longer guided by the profit motive, but by their consciences. Nor is it supposed to be interventionism, because it does not require governmental interventions to secure the working of the economic machine.
In the market economy the individual is free in his actions as far as private property and the market extend. Here, only his valuations count. Whatever he may choose, the choice he makes prevails. His action is, for the other parties in the market, a fact which they have to take into account. The consequences of his action in the market are reflected in profits or losses; they are the one cog fitting his activity into the machinery of social cooperation. Society does not tell the individual what to do and what not to do; nobody gives orders and demands obedience, no force is used unless for the protection of private property and of the market against violence. The cooperation is the result of the workings of the market. Those who do not fit themselves to the best of their ability into the social cooperation feel the consequences of their rebellion, their negligence, their errors and mistakes. This coordination does not require anything more from the individual than acting in his own interest. Therefore, there is no need of orders from an authority telling the individual what to do and what not to do, and there is no need of a power instrument to enforce such orders.
Beyond the realm of private property and market exchange lies the realm of unlawful actions; there society has erected barriers for the protection of private property and of the market against force, fraud, and malice. Here freedom no longer reigns, but compulsion. Here, not everything is permitted, here a line is drawn between the lawful and the unlawful. Here the police power is ready to intervene. If it were any different every individual would be free to break through the barriers of the legal order.
The reformers whose suggestions we are here discussing want to establish additional ethical norms besides the legal order and the moral code designed to maintain and to protect private property. They desire results in production and consumption different from those produced by the unhampered market in which there is no limitation upon the individuals save the one not to violate private property. They want to eliminate the forces which guide the actions of the individual in the market economy. They call them selfishness, egoism, the profit motive, or the like, and they want to replace them with other forces. They speak of conscience, of altruism, of awe of God, of brotherly love. And they want to replace “production for profit” with “production for use.” They believe that this would suffice to secure the harmonious cooperation of men in an economy based on the division of labor so that there would not be any need for interventions—commands and interdictions—by an authority.
The error inherent in this doctrine is that it fails to recognize the important part the forces which it condemns as immoral play in the workings of the market. Precisely because the market economy does not demand anything from the individual with regard to the use of the means of production; precisely because he does not have to do anything not in his own interest; precisely because the market economy accepts him as he is; and precisely because his “egoism” is sufficient to coordinate him to the whole of social cooperation, his activity does not need the direction of norms nor of authorities enforcing the adherence to these norms. If the individual looks out for his own interest within the framework provided by private property and market exchange he is doing everything the society expects of him. In following the profit motive his action necessarily becomes social.
By trying to replace the profit motive, the guiding principle of private ownership of the means of production, by so‐called moral motives, we are destroying the purposiveness and the efficiency of the market economy. Simply by advising the individual to follow the voice of his conscience and to replace egoism by altruism we cannot create a reasonable social order which could supplant the market economy. It is not enough to suggest that the individual should not buy at the lowest price and should not sell at the highest price. It would be necessary to go further and to establish rules of conduct which would guide the individual in his activity.
The reformer thinks, for instance, the entrepreneur is hard and selfish when he uses his superiority to undersell his less efficient competitor and thus forces him to give up his entrepreneurial position. But just what is the “altruistic” entrepreneur to do? Shall he never sell at prices below those of any one of his competitors? Or shall he, under certain conditions, have the right to undersell competitors?
The reformer thinks also: The entrepreneur is hard and selfish when he takes advantage of market conditions and refuses to sell the goods cheaply enough to make them available to the poor who cannot afford them at the prevailing high price. What is the “good” entrepreneur supposed to do? Shall he give the goods away? As long as he asks any price for them, no matter how low, there will always be a demand which will not be satisfied. Which potential buyers is the entrepreneur entitled to exclude from the acquisition of the goods by insisting on a certain price?
We do not have to analyze here in detail the consequences of a deviation from the market price. If the seller is not permitted to undersell his less efficient competitors at least a part of the supply will not be sold. If, in the interest of the poor, he is supposed to sell below the market his stock will not be sufficient to satisfy all those who are willing to pay his low price. We shall have more to say on this matter in our analysis of interferences with the price structure. Here, we merely wish to emphasize that it is not enough simply to tell the entrepreneur that he should not be guided by the market. We would have to tell him what to do. We would have to tell him how far to go in his price concessions and price demands. If the profit motive will no longer determine what and in what quantities he is to produce we shall have to give him definite orders which he will have to obey. This means that his activity must be guided by the very type of authoritarian orders which the reformers tried to make superfluous by appealing to conscience, morality, and brotherly love.
When we speak of “just” prices and “fair” wages we have to keep in mind that the only standard by which we can measure the justice and fairness of prices and wages is their compatibility with an ideal social order. If this ideal social order is sought outside of the market economy, then it cannot be realized by merely exhorting the individual to be “just” in his actions. It is necessary to specify what is just or unjust in each instance. Furthermore, rules must be established exactly regulating all possible cases, and an agency must be authorized to interpret these norms authentically, to enforce them, and also to supplement and modify them whenever necessary. It is irrelevant whether this authority is the worldly state or a theocratic priesthood.
Reformers address their plea for the abandonment of egoism in favor of altruism to the entrepreneurs and proprietors, sometimes to the workers. But the decisive factors in a market economy are the consumers. They determine the attitudes the entrepreneurs and proprietors take. Therefore this plea should be addressed to the consumers. The reformers would have to make the consumer renounce the better and cheaper goods so as to protect less efficient producers. The consumers would have to boycott those goods the sale of which endangers the continuance of conditions which appear socially desirable. And the consumers would have to impose upon themselves restrictions in their buying so as to make it possible for their less wealthy fellow citizens to purchase. If the reformers expect this attitude from the consumer, then they would have to tell him just how, where, and what he should buy, and at what prices. In addition they would have to take measures to force the consumer who does not follow these instructions to obey. But then the reformers would have done precisely what they wanted to avoid, namely, they would have regulated the economy by definite orders and would have penalized the disobedience of such orders.